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Taste for Variety and Endogenous Fluctuations in a Monopolistic Competition Model

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Author Info
Thomas Seegmuller () (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
Abstract

In past years, imperfect competition has been introduced in several dynamic models to show how mark-up variability, increasing returns (decreasing marginal cost), and monopoly profits affect the occurrence of endogenous fluctuations. In this paper, we focus on another possible feature of imperfectly competitive economies: consumers' taste for variety due to endogenous product diversity. Introducing monopolistic competition (Dixit and Stiglitz (1977), Bénassy (1996)) in an overlapping generations model where consumers have taste for variety, we show that local indeterminacy can occur under the three following conditions: a high substitution between capital and labor, increasing returns arbitrarily small and a not too elastic labor supply. The key mechanism for this result is based on the fact that, due to taste for variety, the aggregate price decreases with the pro-cyclical product diversity, which has a direct influence on the real wage and the real interest rate.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00266722_v1.

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Date of creation: Sep 2008
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Publication status: Published, Macroeconomic Dynamics, 2008, 12, 4, 561-577
Handle: RePEc:hal:cesptp:halshs-00266722_v1

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Keywords: Endogenous fluctuations; taste for variety; imperfect competition;

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  1. Jorgen Jacobsen, Hans, 2000. "Endogenous, imperfectly competitive business cycles," European Economic Review, Elsevier, vol. 44(2), pages 305-336, February. [Downloadable!] (restricted)
  2. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June. [Downloadable!] (restricted)
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  3. Weder, Mark, 2000. "Animal spirits, technology shocks and the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 273-295, February. [Downloadable!] (restricted)
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  4. Basu, Susanto & Fernald, John G, 1997. "Returns to Scale in U.S. Production: Estimates and Implications," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 249-83, April.
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  5. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, vol. 52(1), pages 41-47, July. [Downloadable!] (restricted)
  6. Gali Jordi, 1994. "Monopolistic Competition, Business Cycles, and the Composition of Aggregate Demand," Journal of Economic Theory, Elsevier, vol. 63(1), pages 73-96, June. [Downloadable!] (restricted)
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  7. Thomas Seegmuller, 2005. "On the stabilizing virtues of imperfect competition," International Journal of Economic Theory, The International Society for Economic Theory, vol. 1(4), pages 313-323. [Downloadable!] (restricted)
  8. Basu, Susanto & Fernald, John G., 1995. "Are apparent productive spillovers a figment of specification error?," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 165-188, August. [Downloadable!] (restricted)
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  9. Grandmont Jean-michel, 1988. "Nonlinear difference equations bifurcations and chaos : an introduction," CEPREMAP Working Papers (Couverture Orange) 8811, CEPREMAP.
  10. Thomas Seegmuller, 2005. "On the Stabilizing Virtues of Imperfect Competition," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00194173_v1, HAL. [Downloadable!]
  11. Lloyd-Braga, Teresa & Nourry, Carine & Venditti, Alain, 2007. "Indeterminacy in dynamic models: When Diamond meets Ramsey," Journal of Economic Theory, Elsevier, vol. 134(1), pages 513-536, May. [Downloadable!] (restricted)
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  12. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October. [Downloadable!] (restricted)
  13. Rivard Brian A., 1994. "Monopolistic Competition, Increasing Returns, and Self-Fulfilling Prophecies," Journal of Economic Theory, Elsevier, vol. 62(2), pages 346-362, April. [Downloadable!] (restricted)
  14. Burnside, Craig, 1996. "Production function regressions, returns to scale, and externalities," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 177-201, April. [Downloadable!] (restricted)
  15. Cazzavillan, Guido, 2001. "Indeterminacy and Endogenous Fluctuations with Arbitrarily Small Externalities," Journal of Economic Theory, Elsevier, vol. 101(1), pages 133-157, November. [Downloadable!] (restricted)
  16. Duffy, John & Papageorgiou, Chris, 2000. " A Cross-Country Empirical Investigation of the Aggregate Production Function Specification," Journal of Economic Growth, Springer, vol. 5(1), pages 87-120, March. [Downloadable!] (restricted)
  17. Cazzavillan, Guido & Lloyd-Braga, Teresa & Pintus, Patrick A., 1998. "Multiple Steady States and Endogenous Fluctuations with Increasing Returns to Scale in Production," Journal of Economic Theory, Elsevier, vol. 80(1), pages 60-107, May. [Downloadable!] (restricted)
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  18. Kiyotaki, Nobuhiro, 1988. "Multiple Expectational Equilibria under Monopolistic Competition," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 695-713, November. [Downloadable!] (restricted)
  19. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  20. Cook, David, 2001. "Time to enter and business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1241-1261, August. [Downloadable!] (restricted)
  21. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier. [Downloadable!] (restricted)
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  22. Ball, Laurence & Romer, David, 1991. "Sticky Prices as Coordination Failure," American Economic Review, American Economic Association, vol. 81(3), pages 539-52, June. [Downloadable!] (restricted)
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